A business snapshot

The company talks about a “long history of project discovery, acquisition and development across Africa” as part of the business biography. It has two main projects at the moment, namely the RHA Tungsten mine and the Zulu Lithium and Tantalum area.

Like most exploratory and mining businesses, revenue is hard to come by until the firm strikes ‘gold’ and manages to extract and sell a precious metal or other form of commodity. This is true with Premier African Minerals. The half-year results released at the end of September show $0 in revenue, matching the $0 from the same period in 2021.

With sizeable operating expenses, it posted a loss of $4.89m for the six-month period. Due to robust cash balances of over $10m, the company does have a good net asset position. This is one factor that enables it to continue to trade and supports the share price valuation. The market capitalisation is currently $123.05m.

Strong rally in the Premier African Minerals share price

Given the nature of the firm, share price movements are often based on speculation that the business is close to having a major breakthrough. Given the fact that the jump today pushes the one-month return to 37% and the one-year return to 144%, it’s clear that momentum is building.

Part of this is due to the success of the lithium project. An update released just a couple of weeks ago highlighted that “all indications point to the mineralisation being almost exclusively spodumene with little to no petalite and equally low contained micaceous mineralisation carrying any lithium.”

I’m no expert here, but spodumene is a mineral that is a key source of lithium. So the upbeat message from the pilot plant results is that the mineralisation samples are positive. The share price move higher in recent weeks suggests to me that investors are buying quickly ahead of further positive updates.

Another reason why I think the stock has performed well in 2022 is the rising demand for lithium. The push towards electric vehicles will drive demand for lithium, not just right now, but for years to come. Lithium carbonate prices in China have over tripled in the past year. Therefore, there’s a natural correlation to the value of what Premier African Minerals is hoping to extract.

The big dilemma is whether or not I should invest now. I’ll be honest, I’ve seen many companies like this over my years of investing. It’s a binary outcome. If the project yields rich results, I’d generate some serious returns. Yet if nothing materialises, I’d be stuck holding shares in a business with $0 in revenue.

I acknowledge that this stock has the potential to rocket higher over the next year. Yet it’s just too high-risk for me to consider at the moment.

Investors are excited by this metals producer. But is this momentum likely to fade away? Or could I be looking at the early stages of the next mining giant?

A volatile company timeline

Premier African Minerals debuted on the London Stock Exchange in December 2012. The company set out to start a tungsten mining operation covering 1800 hectares. It hoped the operation would be low cost due to excellent nearby infrastructure.

The share price began to tumble until August 2013 when an independent mining study showed strong potential for the tungsten site. This caused the penny stock to shoot up by over 340% in a single week.

The company then reported it was “on-time and on-budget” for its first production in early June 2015.

In June 2015, the Premier African Minerals share price peaked at its all-time high of 3.5p.

The company then began to dilute its shareholders by issuing more shares and expanding its losses with its “next-in-line project”, the Zulu lithium mine, as its next venture.

This was catalysed by complications with Zimbabwe’s National Indigenisation and Economic Empowerment Fund (NIEEF) which drove the tungsten mines out of production in 2019.

Zulu lithium project’s success

The downfall of the tungsten site drove the Premier African Minerals share price to staggering lows of just 0.2p in 2019.

Since the start of 2022, the share price has risen from 0.18p to 0.37p as I write.

A £1,000 investment at the start of 2022 would have bought over 555,000 shares in the company, which would now be worth double the original investment.

Redirecting efforts towards lithium has paid off. The company announced in June this year that it will begin shipping spodumene concentrate from its mine in Zimbabwe to China by March 2023. This followed the signing of a deal with Suzhou TA&A.

The future of lithium

I think it looks like it will be an exciting time ahead for Premier African Minerals shareholders.

China appears to be behind a global acquisition spree for early-stage lithium mining projects. The country accounts for 65% of battery production, of which lithium is a core element. However, China’s access to lithium deposits is limited.

With the demand for electric cars on the rise, it’s no wonder China is so keen to fuel the growth of global lithium mining production to ramp up battery manufacturing capacity.

I think Premier African Minerals is a strong contender to land more attractive deals with China in the future with its proven ability to raise capital.

However, its ability to meet production targets and overcome regulatory hurdles is less proven. Investing in Premier African Minerals certainly comes with significant risk. But having held its shares since 2018, I am tempted to increase my position even now.

I will be keeping a close eye on this penny stock, eager to see how its future unfolds.

Today I’m looking at two penny stocks that I think have considerable potential, owing primarily to the changed resource environment that we’re living in.

Amid greater competition for resources, I believe that we’re entering a period of scarcity characterised by higher commodity prices. As such, I think these two innovative mining companies could be good long-term additions to my portfolio. And I think the current prices could be solid entry points.

Premier African Minerals

Premier African Minerals (LSE:PREM) shares soared in January, but the early-stage exploration company isn’t currently producing.

That not to say it hasn’t produced before. A few years ago it had active tungsten mines, but they’re no longer active.

However, the period of inactivity is soon to be over. Earlier this year, the firm moved forward with its Zulu project, located 80km from Bulawayo in Zimbabwe. Premier African Minerals has confirmed the presence of lithium at relatively shallow depth of 68 metres.

And in June, the company said it had entered a marketing and prepayment agreement with Suzhou TA&A, which would allow it to commence construction activities at the site immediately.

Premier African Minerals now expects to see first shipment before March 31, and says it will steadily build up production to around 48,000 tons of spodumene concentrate per annum.

Prices for this concentrate have been going from strength to strength since the pandemic — Spodumene is a pyroxene mineral consisting of lithium aluminium inosilicate. Lithium is increasingly demanded for products like electric car batteries.

However, it’s worth noting that mining is a cyclical industry. Commodity prices could well fall this year if we see a global economic downturn.

At 31p, I’d buy this stock for my portfolio. Although it’s worth noting the sizeable spread between the buying and selling price.

Kropz

Kropz (LSE:KRPZ) is another Africa-focused mining company that isn’t producing yet. The company mines for rock phosphate — the raw material used in phosphate fertilisers. It may play an important role in the food industry in future decades.

With fertiliser prices going sky-high, it looks like a good business to be in right now. But there’s more behind the business model. Kropz recognised that population growth in Sub-Saharan Africa was contributing to rising food demand, while fertiliser use in farming remains low on the continent.

Around 85% of rock phosphate is used in fertiliser production.

In 2010, Kropz took control of the Elandsfontein phosphate project, in South Africa’s Western Cape province.

Shares in the innovative mining company tanked in April after the group said it would push back its first bulk sale. But it hopes to make its first such sale this year.

Kropz also owns the Hinda rock phosphate asset in Republic of Congo. The asset could be “one of the world’s largest undeveloped sedimentary-hosted phosphate reserves,” the group said in a statement.

Getting production going will ease investor sentiment here. Some investors may have been concerned about the volatility of Congo and its impact on assets there.

I’d buy this stock now before production comes on-line. Once again, the sizeable spread is a concern, but I’m in this for the long run.

But is this just short-term excitement from traders, or should I really consider this business for my long-term portfolio? Let’s take a closer look.

Investigating the penny stock

Premier African Minerals is an early-stage exploration company. The group did have active tungsten mines a few years ago. But due to complications with Zimbabwe’s National Indigenisation and Economic Empowerment Fund (NIEEF), they’re no longer active.

Since then, it’s been on the prowl for a new development site, and it may have just found it. Management recently released a drilling update for its Zulu project. After performing early-stage tests, the company has confirmed the presence of lithium starting from a relatively shallow depth of 68 meters and with an average grade between 1.05% and 2.02%.

While the ore grade is pretty standard, the drilling location was selected based on a geological model developed by Shango Solutions. The discovery of lithium indicates the model is accurate. And since it also predicted further deposits northwest of the testing site, the mineral resource estimate could be set to increase considerably.

If that wasn’t enough, management has also signed a non-binding ‘Heads of Terms’ agreement with a lithium manufacturer to fund its Zulu project. With money potentially secured, the presence of lithium confirmed, and a possibly larger than expected deposit, it’s hardly surprising to see why the penny stock exploded on the news.

Taking a step back

As exciting as this progress is, investors may be getting ahead of themselves. As I’ve already said, this business doesn’t have a revenue stream. And with limited cash reserves, it needs to find external capital.

But is that fine because of the signed funding agreement? Well, no. The deal is still in its infancy and is entirely subject to further negotiation, as well as plenty of due diligence. Nothing may come of it. And in that case, the penny stock will have to find another investor.

But even if funding is secured, there still remains years of testing and site development ahead before any commercial production can begin. That’s plenty of time for something to go wrong. And it’s one of the highest risk factors early-stage mining companies suffer from.

In other words, the recent boost in the penny stock is entirely driven by expectations rather than fundamentals. In my experience, that’s a dangerous path to take as an investor. After all, if the slightest sign of trouble emerges that could compromise aggressive investor forecasts, I wouldn’t be surprised to watch the penny stock collapse.

Needless to say, I’m not keen on adding this business to my portfolio today. But given time, the uncertainty about its future could dissipate and reveal a thriving investment opportunity. That’s why I’m keeping it on my watchlist.

In the UK, penny stocks are shares that cost less than one pound and which have market caps of under £100m. They are generally listed on the FTSE Alternative Investment Market (AIM). In the US, they are shares that cost less than $5 with a market cap of less than $300m.

Penny stock success

The small scale nature of penny stocks mean that they are generally fairly risky. One of their hallmarks is that the company issuing them often hasn’t yet fully developed their product or service, and consequently are unlikely to be generating much profit or revenue.

Of course, the advantage is that they have plenty of room for growth – and sometimes, this can be explosive. It’s also worth remembering that many blue chip stocks started out as penny stocks.

Famous examples include Apple (NASDAQ: AAPL), which traded under a dollar a share in 2003, and is now the most valuable company in the world. Its market cap of $2.5trn is worth more than the entire UK FTSE 100. Or Amazon (NASDAW: AMZN), which initially traded for two dollars a share in 1997. Its current share price is $3,421. 

A more recent example is Workhorse Group (NASDAQ: WKHS), which was under a dollar a share in mid-2019, and now trades at $9 two years later.

Penny stock potential

Premier African Minerals (LSE: PREM) is a mining company that is developing operations all over Africa. It owns 49% of the RHA Tungsten mine, and has interests in the Otjozondu Manganese Mining Project in Namibia, and the Danakil Potash Project in Ethiopia. 

The company has a solid track record in creating wealth from mining exploration; board member Stephen Dattels was a co-founder of UraMin, a uranium miner that sold for $2.5bn in 2007.

The penny stock recently won a three-year exclusive prospecting order (EPO) in Zimbabwe over the Zulu lithium claims. Premier African Minerals believes these claims could constitute the largest undeveloped lithium mine in Zimbabwe. CEO George Roach said that “our exploration teams are appointed, airborne geophysics and other remote sensing has been commissioned, and we have high expectations for lithium, caesium and tantalum pegmatite discovery.” 

Two weeks ago, it announced that it would reduce funding to the RHA mine to concentrate on the Zulu project, and issued 500m new shares at 0.20p each. The miner said that it planned to use the £1m raised on developing the new operation. The company estimates initial returns of between $207m and $377m. Roach commented that the company is “well positioned to ride this wave of interest.” 

At 0.18p today, I think its share price could rise sharply if the Zulu project takes off. But there’s no guarantee that it will. Mining exploration is fraught with setbacks and risk. Long-term profitability is a long way off.

Its share price hit an all time low of 0.02p four years ago, and this could happen again. However, based on my personal cost-benefit analysis, it’s a penny stock I’d buy today.

So why did the share price surge? Will it continue to do so? And should I be adding the stock to my growth portfolio? Let’s take a look.

A mining company in distress?

As previously stated, Premier African Minerals is a mining business. It digs up tungsten from the ground. But in 2019 that’s not what happened. Due to a complication with Zimbabwe’s National Indigenisation and Economic Empowerment Fund (NIEEF), PREM’s tungsten mine became fully impaired. In other words, it’s currently non-operational, and the management team said it will remain that way until the matter with the NIEEF is resolved.

Consequently, the business generated no revenue in 2019, and the mine is still non-functional today. Needless to say, this isn’t exactly good news. So why did the share price suddenly start climbing?

It seems that PREM finally caught a break and was granted a three-year Exclusive Prospecting Order (EPO) in Zimbabwe. This agreement enables the firm to begin exploring a large area of land that is expected to contain up to 80 million tonnes of lithium oxide — an essential ingredient for electric vehicle batteries.

Given the limited supply and rising demand for the metal, this presents a fantastic opportunity for PREM and its share price. But let’s not get ahead of ourselves here.

The risks are high

The EPO is an exploration license only. Its purpose is to allow mining companies to find suitable sites to start digging in the future. As it stands, PREM doesn’t have any active mines, and its new lithium sites will take a good couple of years before becoming active.

During that time, many things can go wrong. Its tungsten operation (or lack thereof) is proof of that. Developing new mining sites and maintaining existing ones is an expensive process. PREM is not currently generating any revenue and has less than $40,000 of cash on its balance sheet. So the business is entirely dependent on outside funding that may not be available in the future.

What’s more, the mining industry worldwide is subject to numerous regulations designed to protect workers’ safety, the environment, and local economies. However, Zimbabwe is not the most politically stable country, exposing PREM to the risk of sudden regulatory change that may significantly impact its share price.

PREM share price: time to buy?

Securing the EPO is undoubtedly a good development for the firm. It most definitely adds more value to the business, and over the long term, could be a catalyst for the share price to keep on climbing.

But with no revenue, plenty of expenses, and a long road ahead to becoming profitable, the risks are exceptionally high, in my opinion.  Personally, I think the rise in PREM’s share price is a bit premature. Therefore, I won’t be adding the stock to my portfolio today.